Insurance product, rating system and method

ABSTRACT

In the present invention, an insurance product, rating system and method generally relates to a rating and pricing system for quantifying the risk that the annual savings will not fall below specified levels associated with implementing and maintaining economic improvements. The product, system and method can be applied to various industries, including, power generation, petro-chemical, manufacturing and refining facilities. Various embodiments disclosed herein relate to a system and method for establishing a rating system to determine the impact on an insured&#39;s credit risk.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a divisional patent application of prior U.S. patentapplication Ser. No. 11/153,305, entitled “INSURANCE PRODUCT, RATINGSYSTEM AND METHOD,” filed on Jun. 15, 2005.

STATEMENTS REGARDING FEDERALLY SPONSORED RESEARCH OR DEVELOPMENT

N/A

REFERENCE TO A MICROFICHE APPENDIX

N/A

BACKGROUND OF THE INVENTION Field of the Invention

Pricing and rating methods for property and property-related assetperformance insurance products can be classified into two categories:Value-based (VB) rating and Frequency-Severity (FS) rating. In bothcases insurance costs are directly related to the financial losspotentials, but the computational methods reflect the characteristics ofthe property or assets being insured.

VB rating generally is applied to situations where risk or losspotential can be characterized by a series of variables. For example,the loss potential and pricing for a new car may be determined by thecar type, the type of loss (e.g., collision, liability, glasswindshield) the amount and type of miles driven, the driving record ofthe insured, the geographical location and perhaps other variables.Given these variables, loss potentials have been analyzed and tablesproduced enabling the underwriter to look up the rates, expressed indollars of premium/dollar of coverage, in tables. The underwritertypically multiplies the client-specific variables by the correspondingrates then adds in company-specific administrative costs to compute theoverall policy premium.

For property VB insurance, some common underwriting variables arebusiness type, building activity (e.g., hospitals, office buildings,laboratories, etc.), square footage or other attributes of size,construction attributes, fire sprinkler coverage, number of stories,location, and age. Premium rates expressed are generally categorized bythese variables and together produce a premium rate. This valuemultiplied by the building value produces the policy premium. Actualpremium values may vary by historical precedent of pricing, marketdemands, policy terms and conditions, contents type and propertyreplacement values.

FS pricing is a rating and pricing method for situations where there canbe large differences between insureds in the same type of industry andgeographical area. In this method the probability or failure frequency(events/year) of an insurance claim or failure may be modeled ordirectly obtained from available data.

Engineering and underwriting risk modifiers are factors applied to theloss cost computed premium that adjust for specific customer attributespresent in the current situation. For example, an engineering riskmodification factor to increase the loss cost 10% could be applied forclients who have poor procedures for record-keeping and plantcleanliness. Engineering inspectors have identified a high correlationwith these behaviors and customers who will have insurance claims. Anunderwriting risk modification factor of 10% could decrease the policypremium if high deductibles and restricted coverages are negotiated withthe client. These engineering and underwriting risk modification factorsmake detailed premium changes based on the specific attributes of theclient and the policy terms and conditions.

An example of the FS pricing method for a client is applied to anequipment breakdown premium development for a power generation station100 shown in FIG. 1. The station has two (2) simple cycle GE 7FA turbinegenerators 102, 104 with two (2) transformers 106, 108 and various typesof electrical switchgear and equipment (only switch 110 is shown). Thefirst part of the premium calculation contains the frequency andseverity calculation which determines the loss cost component of thepremium. There are risk modification factors that customize the losscost component for the specific client being analyzed. These factors canincrease or decrease the credit and debit percentage that allowsunderwriting to modify the loss cost to reflect the subjectiveattributes (e.g., engineering factors) of the client, for example,housekeeping, recordkeeping, reliability planning, the number ofequipment spares available and underwriting factors such as thedeductible value selected.

The next part of the premium calculation determines the client-specificexpenses, costs and profit. Another component of the premiumcalculation, the Excess Loss Potential refers to a loss cost premiumcomponent that accounts for the very low frequency, but very highseverity loss events that are appropriate for the client. Examples ofsuch loss events include five hundred (500) year recurrence periodearthquakes, tsunamis and hurricanes. The loss event severities may bedetermined by specialized catastrophic modeling software. A portion ofthe insurance company's total loss potential may be allocated to eachclient as the Excess Loss Potential component of the premium.

The client may also be subjected to engineering inspections associatedwith jurisdictional requirements of the state or other governmentalbodies. The underwriting process also includes certain client-specificcosts associated with meetings, travel and the like.

Expenses considered in the underwriting process can also include costsfor re-insurance and are usually added when the underwriter buysfacultative re-insurance—re-insurance on a specific account. Althoughother expenses that involve a pro-ration of portfolio, line of business,department, or division expenses to the account level may also be added.Other premium costs are typically taxes, commissions to brokers, profitmargin and other specified premium cost adders in the company'sunderwriting guidelines.

The FS pricing for the example above is shown below for constructing anequipment breakdown insurance price for a simple cycle gas turbinegeneration facility:

Annual Failure Premium Equipment Frequency Severity (Loss Costs) 2 GE7FA turbines 0.025 $80,000,000  $2,000,000 2 Transformers 0.015$4,000,000 $60,000 Switchgear + Electrical 0.030 $1,000,000 $30,000Total Loss Costs: $2,090,000 Engineering/Underwriting Modifier (+20% −15%) [−10%] $1,881,000 Excess Loss Potential: $100,000 EngineeringExpenses $25,000 Underwriting Expenses $10,000 Allocated Expenses$300,000 Taxes, Commissions $30,000 Profit (5%) $115,000 Total PolicyPremium: $2,461,000

Policy rating and pricing applied to property-related insurance pricinggenerally is a combination of applying the VB and FS methods. Theinsured's (client) property often contains a mix of highly specificequipment and other activities that are common to many similar types oflocations. A client's power generation company may own a small number ofhighly specialized power generation locations that are rated and pricedusing FS but also has several branch offices where the premium may becomputed by the VB method.

BRIEF SUMMARY OF THE INVENTION

The present invention referred to herein as the insurance product,rating system and method generally relates to a rating and pricingsystem for quantifying the risk that the annual savings will not fallbelow specified levels associated with implementing and maintainingeconomic improvements. The invention typically involves a uniquecombination of qualitative and quantitative functions and factorscombined in a novel fashion to develop premium costs for risk transferassociated with insuring a minimum savings amount annually or inaggregate over a multi-year policy term.

Insurance pricing systems where there may be a large amount of exposureand loss data available use standard statistical and probabilisticmethods. Policies are often standardized in format and simplified to thepoint where underwriters construct premiums from tables where the riskattributes such as insured's age, car type, location, or building valuesare the key elements used to lookup the appropriate rates. Otherinsurance policies, such as for property insurance, may include apremium component developed from catastrophe models which estimatelosses from earthquakes, for example.

Insurance pricing systems are normally designed for products which aremarketed to a large number of customers usually on an annual basis, eachwith a relatively small loss potential. The present invention comprisesan insurance product rating and pricing system designed for a relativelysmall number of insureds annually or over a multi-year term with eachinsured having a relatively large exposure. This situation cannot relyon the Law of Large Numbers principle of statistics but applies as muchknowledge and actual performance data as possible into the developmentof the risk analysis and subsequently the premium development.

The insurance policy rating and pricing system according to the presentinvention may generally be based on a risk analysis where actualperformance data, technical uncertainties, and other factors arecombined to form input information for the pricing system. The inputfiles, called annual aggregate risk distributions, quantify the netperformance risk of all initiatives for achieving the net annual savingsfor each year of the policy period. For example, an improvement programmay consist of work force reassignments, process re-designs,installation of advanced process controls, and energy efficiency capitalprojects. However, this invention is not so limited. As a furtherexample, it also applies to other methods capable of quantifying thetotal net annual savings risk of potentially several hundredinitiatives. These risk distributions quantify the probability ofexceeding a given net annual savings value and serve as the fundamentalinput files, data, or equations according to the present invention. Thepresent invention enables underwriters to apply similar procedures theywould perform in standard insurance situations even though the nature ofthe insured risk is unique.

According to the present invention, “Savings” can be tangible orintangible and include but are not limited to increased revenue; reducedoperational expenses maintenance expenses and capital expenditures;increased production through-put; reduced energy consumption; reducedemissions; increased emission credits; etc. These savings will produceadditional benefits to the client in the form of enhancedcreditworthiness and resulting increased availability of financing andreduced cost of financing. One skilled in the art will recognize thatthe present invention can generate other savings and benefits notarticulated in the lists above.

The aggregate risk distributions are defined for each location on asimilar basis as that applied to develop property insurance.Underwriting may be first performed at a location level and then viewedat the client level. One novel part of this invention is to enable theunderwriter to develop pricing at either level. At the location level,the aggregate risk distributions are formed for the subset of allinitiatives designed to be implemented at the location. At the clientlevel, the aggregation produces only one aggregate risk distribution peryear or other time periods.

If location level pricing is desired, then according to the presentinvention, aggregate risk distributions are applied at each location andthe client level premium may be equal to the summation of the locationlevel premiums. Some premium components may appear only at the clientlevel, such as profit, tax, and commissions, but the system and methodaccording to the present invention contains the flexibility to includeall pricing elements in either version of the application of thisinsurance pricing system.

While the invention is generally discussed from the perspective ofeither pricing a single location or pricing at a single client level, amulti-client pricing system is also within the scope of the presentinvention. Multi-client as used herein includes but is not limited to aninvestor(s) in one or more facilities, for example power, refining,chemical, manufacturing facilities, etc. in any permutation orcombination of ownership and/or geography.

BRIEF DESCRIPTION OF THE DRAWINGS

A better understanding of the present invention can be obtained when thefollowing detailed description of the preferred embodiment is consideredin conjunction with the following drawings, in which:

FIG. 1 is a block diagram of a power generation station.

FIG. 2 is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 3 is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 4 is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 5A is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 5B is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 6A is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 6B is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 7A is a spreadsheet of an embodiment of the claimed product, systemand method.

FIG. 7B is a spreadsheet of an embodiment of the claimed product, systemand method.

FIG. 8 is a flowchart of an embodiment of the claimed product, systemand method.

FIG. 8A is a table of an embodiment of the claimed product, system andmethod.

FIG. 8B is a chart of an embodiment of the claimed product, system andmethod.

FIG. 8C is a chart of an embodiment of the claimed product, system andmethod.

FIG. 9 is a chart of an embodiment of the claimed product, system andmethod.

FIG. 10 is a system block diagram of one embodiment of the claimedproduct, system and method.

FIG. 11 is a block diagram of an insurance policy according to theclaimed product, system and method.

FIGS. 12A-12D are tables of an embodiment of the claimed product, systemand method.

DETAILED DESCRIPTION OF PREFERRED EMBODIMENTS

The underwriter first determines the insured floor dollar values foreach year as shown in step 200 in FIG. 2. This may be performed byspecifying a confidence level that is used to return the indicated orcomputed minimum insured savings values for all years or confidencelevels and can be applied on a year by year basis. Selecting insuredfloors by first specifying an explicit confidence level is one uniquecharacteristic of this invention. For this invention, “confidence level”is defined as the probability that the annual savings will exceed theinsured floor value. Performing this function is called risk acceptance.For each policy year, the underwriters select the risk acceptance levelthey believe represent insurable positions under the terms andconditions of the policy at step 202. The insured floors are also calledrisk acceptance thresholds in that if the insured's annual Savingsresults are below these values and the insured is in compliance with theterms and conditions of the policy, the insurer would pay the insuredthe difference between the actual achieved results and the insured floorvalue at steps 204 and 206, respectively. Under the insurance policy,the insurer is accepting the risk of paying up to the risk acceptancethreshold dollar amount each year.

These risk acceptance values are also related to claim frequency asdepicted in FIG. 3. The method starts at step 300 where a confidencelevel percentage is determined at step 302. The difference between 100percent and the confidence level percentage constitutes the probabilitythat the Savings may be less than the risk acceptance value at step 304.For example, a 90% confidence level indicates that 10% of the time, theSavings is expected to be less than the indicated acceptance value.While additional claim frequency mitigation elements are applied in thisinvention, the 100 minus confidence level may be an upper limit on theexpected annual claim frequency.

Another unique characteristic of this invention is to use the confidencelevel approach to enable underwriters to apply different risk acceptancejudgments for different policy years. This may be but one majoradvantage of setting deductibles by confidence level rather thandirectly in terms of absolute dollar values. However, underwriters canchoose a risk acceptance value directly and apply the input annualaggregate risk distributions to determine the corresponding riskacceptance confidence level. Both methods are included in thisinvention. Also the application of input annual aggregate riskdistributions to help specify multi-year deductibles is a unique part ofthis invention.

The flexibility of specifying yearly or overall confidence values enableunderwriters to set risk acceptance values higher for years they believethere is higher risk and lower amounts when the risk is within normaltolerances. This can occur if the underwriters believe that theinsured's implementation and scheduling plan will not either meet theexpected Savings targets or that the project schedule is too aggressiveimplying that the insured's Savings will be achieved but not in thepolicy year indicated in the implementation and scheduling plan. Thisfeature gives underwriters the flexibility to adapt their riskacceptance analysis to consider in addition to the insured's engineeringperformance, the available personnel, project management, and severalother key factors.

As an example of how this process can be performed, suppose a potentialinsured's cumulative Savings engineering project plan forecasts $20M inyear 1, $30M in year 2, and $35M in year 3 as depicted in step 400 ofFIG. 4. After a detailed review of the implementation and schedulingplan by underwriting, the completion schedule for the year 1 is judgedto be too optimistic. Underwriters believe that the Savings as forecastby year 1 will be obtained but some of the initiatives will extend intoyear 2. For the remaining initiatives, it is further concluded that theSavings targets will be achieved on the time schedule indicated in theimplementation and scheduling plan for years 2 and 3.

For this situation underwriters may apply a higher confidence level foryear 1 than for years 2 and 3 at step 402. A 95% confidence level couldbe applied to year 1 with a 90% confidence applied to years 2 and 3. Theresulting risk acceptance values may be $10M for year 1, $22M for year2, and $25M for year 3. It may be expected that the risk acceptancevalues will be less than the stated engineering forecasts as a matter ofproper underwriting, for example, to reduce the potential for moralhazard.

With the risk acceptance values selected, the next underwriting decisionis to choose the confidence level associated with the loss cost analysisat step 404. For example if an underwriter chooses a 95% confidencelevel, the corresponding loss costs actually experienced should be lessthan this value 95% of the time. A unique characteristic of thisinvention is the capability of the underwriter to select a loss costconfidence level by year or, by default, use the same value for allyears.

Another unique characteristic of this invention is the ability to applydifferent savings measurement criteria as claim triggers. One embodimentof the invention contains two types of savings measurement criteriaalthough a combination or other methods could be applied.

The underwriter selects the measurement method and for this example ofthe invention, the methods are Escrow or No Escrow. The Escrow approachaccumulates the excess above the risk acceptance values, if any, in theSavings over the policy years. If there is a shortfall in a policy year,the Escrow account may be debited first. A claim occurs when the Escrowaccount is zero and a yearly savings target is not achieved. The NoEscrow method simple compares the actually achieved value, A, to insuredSavings value, B, and a claim for the dollar difference $B-A occurs ifA<B.

While the underwriter selects the measurement method in the system, itis not necessarily an input that is determined by the underwritingfunction. The claim measurement method may be identified as part of thepolicy and may be agreed to by the insured, insurer, and otherinterested parties such as investment firms, banks, or rating agencies(e.g., Standards & Poor).

At this point, FIGS. 5A and 5B illustrate the system for computing losscosts using a stochastic model that utilized the input annual aggregaterisk distributions, risk acceptance values, the claims measurementmethod, and the required loss cost confidence level shown at steps 500and 502. This is a dynamic system where at any one of these inputschange, the stochastic model is re-run at step 504. This combination ofthese policy-specific attributes and risk data to produce loss costs isa unique characteristic of this invention.

At the completion of the stochastic analysis which may require severalthousands of different samples to accumulate the sufficient loss costdistributions, the loss costs at the underwriter specified levels isautomatically placed into the pricing worksheet at step 506. The valuesare summed over the years of the policy term (e.g., over a range of oneto seven years) at step 508 and compared with a company-specificrequirement of a minimum rate-on-line at step 510. Rate-on-line isdefined as the loss costs (or premium) divided by the total dollarexposure to the insurer. For example, a 5% rate-on-line requirement fora $1M total exposure produced a premium result of $50,000. The maximumof these two numbers: the sum of the loss cost values from thestochastic model and the rate-on-line estimated premium, is entered asthe loss cost component of the multi-year policy premium at step 512.

With the loss costs determined, the underwriter adds premium chargesthat are due to the engineering and underwriting fees that will berequired to administrate the policy over the policy term at step 514.These expenses include for example, on-site engineering review of workpractices, initiative implementation progress, and the Savingsmeasurement and verification procedures. These activities will generallyvary according to the type of industry, facility location, policy term,policy conditions, and with several other factors. It is noted that thepremium reflects the true costs of policy administration as well as thepotential costs involved with actual losses. These costs are enteredindividually for each policy year, inflated using a supplied annualinflation rate, and summed to produce the overall engineering andunderwriting (insurance) components at step 516. These costs are mostlywell defined expenses and are not typically risk-based nor do theypossess a significant stochastic component. At this point in the premiumdevelopment, these charges are placed into the year and category(Underwriting or Engineering). Additional analysis of factors thatinfluence the loss cost premium component is generally required beforethe expense items can be used further.

Along with the quantitative aspects of underwriting and premiumdevelopment, there are subjective factors that are designed to utilizethe underwriter's intuition and experience to modify, if desired, thecomputed loss cost premium at step 518. These factors can increase ordecrease the loss cost component within prescribed percentage ranges. Tofacilitate the underwriter's use of these subjective factors, they aredivided into engineering and underwriting categories. The actual list ofrisk modification factors and ranges will vary between industries andclients but they may include some of the items listed below.

A credit is interpreted as enhancing risk quality which then translatesinto a decrease the loss costs. A debit is configured as a decrease inrisk quality which increases the loss cost component of the policypremium.

Engineering Quality Underwriting: [Debits, Credits]

1) Organization/Culture: [+15%, −10%]

Risk exposures, hazards, and human behaviors are inter-connected. Acompany's safety, environmental, reliability policies and basic culturalrisk acceptance attitudes are important attributes for inferring how thecorporation and its employees will routinely mitigate risk and alsorespond to accidents

2) New Technology Applications: [+10%, −10%]

Depending on the robustness of the new technology design, theoperational and short term financial advantages can be offset by adecrease on reliability and availability in the long term. These factorsneed to be considered by the underwriter in this multiyear type ofinsurance policy which is intended to insure a minimum performance orSavings level.

3) Management Motivation: [+15%, −10%].

The underwriter needs to understand how the company's management intendsto leverage the financial applications of the overall implementation andscheduling plan. The multi-year program will require the long termcommitment of management and the financial applications of the programwill provide the underwriter valuable insights to judge the Savingssustainability.

4) Supervisor Motivation: [+15%, −10%]

The underwriting risk assessment for facility supervisors may be similarto what may be required for management. At the employee-level,supervisors need to be committed to the implementation and schedulingplan's success and to its sustainability over the multi-year policyterm. One way for the underwriter to assess supervisor (and management)commitment may be to determine how the execution of the Savingsimplementation and scheduling plan is connected to the employee bonusprogram.

5) Complexity: [+10%, −10%]

Complexity refers to the difficulty of program execution. Some of theissues to be considered in this evaluation are initiative technicaldifficulty, volumetric inter-dependence, and schedule inter-dependence.

6) Housekeeping and Recordkeeping: [+5, −5%]

The cleanliness, arrangement, and organization of the insured's assetsare valuable, observable indicators to infer employee reliability andsafety awareness. Many studies have shown a strong productivity andreliability correlations to facility and asset cleanliness andorganization. This characteristic may be easy to observe and inferenceto improved reliability may be a factor in the engineering aspects ofpolicy underwriting. Also the level and accuracy of production andoperational recordkeeping may be another visible indication ofemployees' and management's commitment to procedure compliance andattention to detail that also reflects the engineering risk quality ofthe insured's facilities.

Overall the summation of the debits and credits of one embodiment isgenerally limited to a total of a 20% credit (premium decrease) or a 25%debit (premium increase.)

Underwriting quality refers to the terms and conditions of the insurancepolicy that are negotiated given the operational and engineeringconditions of the implementation and scheduling plan. These riskmodification factors measure risk quality from a written contractual,rather than technical, perspective.

The credit and debit assignments follow the same convention as with theengineering risk modification factors. A credit is interpreted asenhancing risk quality which then translates into a loss cost reduction.A debit is configured as a decrease in risk quality which is expressedas an increase the loss cost component of the policy premium.

Underwriting Quality Underwriting: [Debits, Credits]

1) Exclusions: [+10%, −10%]

These policy terms refer to events for which the insurance policy wouldnot respond to Savings achievement levels below the insured minimum.These events include, war, worker strikes, weather events, eventscovered under other insurances, failure of the insured to comply withpolicy conditions, and contractor performance errors.

2) Self Insured Retention/Deductibles: (+10%, −10%]

The self insured retention or deductibles determine the insured's totalfinancial risk exposure. If the insured is willing to assume higherannual Savings levels, then the risk quality from an underwritingperspective can be increased since the insured accepts a larger annualSavings shortfall before the insurance policy would respond.

3) Savings Measurement & Verification: [+15%, −10%]

The type of Savings and the procedures for measurement verification arefundamental to insurance underwriting. These factors are essential todetermine initiative implementation quality both in time and volumetricsavings achievement. There are, however, different ways these functionscan be accomplished. For example, the measurement and verification canbe performed by the insured and audited by the insurer, or a third partycan be charged with these tasks. Involving the insured in these actionscan be problematic and provide a moral hazard if insufficient oversightis not maintained. Savings measurement and verification can also providea proactive indication of initiatives which are behind implementationtargets. The underwriter needs to assess the type of measurements beingtaken to measure the Savings, the frequency of measurement, the abilityto access this data trending, and the propensity to obfuscate actualinitiative performance.

Overall the summation of the debits and credits are limited to a totalof a 20% credit (premium decrease) or a 25% debit (premium increase.)

The aforementioned factors are routinely applied in policy underwritingand premium development depending on the type of insurance, life,casualty, property, etc. and also on the nature of the insured'sbusiness. The actual number and type of Engineering and Underwritingrisk modification factors will vary depending on the type and nature ofasset performance under policy consideration.

The “Adjusted Premium” is now computed at step 520. This term is definedas the aggregate policy term loss costs multiplied by the Engineeringand Underwriting risk modification factors. If E=the aggregateengineering risk modification factor, U=the aggregate underwriting riskmodification factor, and L the loss costs, then the adjusted premium,P_(adj) is determined by

P _(adj)=(1+E+U)*L

The final stage of the premium development is to add premium componentsassociated with insurance pricing elements at step 522. These itemstypically include engineering & administrative expenses, profit,reinsurance costs, taxes and commissions.

There are several variations and combinations of these factors that canbe applied to the insurance product, rating system and method. The mostnotable variation may be the decision on how to account for theengineering expenses. Some insurance policies of the present inventionmay include all engineering fees in the policy premium and some mayexclude the charges from the policy premium and charge these fees asconsulting expenses independent of the insurance policy.

As an example of how the insurance policy pricing according to thepresent invention is performed, the following example shows premiumdevelopment according to the present invention for a three year policywhere engineering fees are incorporated into the premium calculation andis used to develop the loss costs.

An embodiment of the overall claimed subject matter follows in FIGS. 6Aand 6B.

600 Input Basic Client Data into System.

At step 600, the user enters: Insured Name, Lending Institution, Country& Region, Addresses of Covered Locations, Occupancy, Location Size inProduction Output Metrics, and Application of Insured Savings. Thisbasic data can be integrated with a client database so that other keyvariables required by the system can be automatically identified fromthis basic data.

610 Develop the Numerical or Analytical Distributions of Savings byYear.

At this step an overall annual probability distributions are compiledand placed in a format so they can be accessed dynamically. Thedistributions describe the probability of exceeding annual Savings vs.the savings values. The distributions can be taken by analytical methodsdesigned to compute aggregate Savings exceedance probabilities. There isa separate distribution for each location, plant, unit, or other segmentunder analysis for each year. These distributions are composed ofSavings values and the corresponding probability of exceeding thesevalues.

620 Enter Market and Company Pricing Criteria Data.

At this step, the inflation rate that is representative for the policyperiod and the minimum and maximum rate-on-line company-specifiedcriteria are entered into the system.

630 Choose the Probability of Exceedance Thresholds to be Used to Setthe Insured Floors: the Insured Savings Levels by Year, by Location, orby Other Groupings.

At this step the amount of risk that the insurer is willing to accept isdetermined by setting the exceedance probability threshold for coverage.There are two ways this can be done, the user can choose a probabilityof exceedance for all years or a different value for each year dependingon the underwriting information. The probabilities are matched in theprobability distributions compiled on step 610 and the correspondingSavings values are identified. For example, suppose the insurer iswilling to accept an exceedance probability (measured in percentage) of90% for a given location for a given year. This value is matched to theappropriate probability distribution discussed in step 610 and thecorresponding Savings value is found to be $15M. This means there is a90% chance that the location's annual savings that year will be greaterthan $15M. An insurance claim may be triggered if the annual savingsachieved is less than the $15M value.

640 Record the Savings Levels by Year, Location, or Other Grouping inthe Loss Cost Component of the Pricing Development System.

At this step, the resulting Savings values that are calculated oraccessed from the probability distributions compiled in step 610, areentered into the loss cost component of the pricing system. These valuesare the resulting insured levels that correspond to the probability ofexceedance values entered into the system in step 630.

650 Develop Logic to Test Annual Savings Results Selected from theAnnual Probability Distributions Compiled in Step 610 to Measure Lossand Excess Event Frequency and Severity.

At this step for each year or other grouping, the logic is developed tocompare a sampled distribution Savings value from the probabilitydistributions compiled in step 610 to the recorded values savings floorSavings values. If the sampled Savings value is greater than the inuredfloor, then an excess is produced for that year. If the value is lessthan the insured level as given in step 640, then a loss event isproduced for that year.

660 Develop Escrow Account and Claim Trigger Logic.

At this step, the comparison logic developed to accumulate the total ora fraction of the Savings results that are in excess of the insuredsavings values. For example, in one year if the computed Savings is $50and the insured floor is $40, $10 would be credited to the escrowaccount. On the other hand, if the computed Savings was $35, then firstthe Escrow account would be debited $5 to obtain the insured level. Ifthe escrow account contained insufficient funds then an insurance claimwould be triggered for the difference between the insured level and thesum of the actual Savings results and any funds able to be drawn fromthe escrow account.

670 Develop Claim Count, Claim Amount and Claim Risk Distribution Logic.

At this step, logic is developed to accumulate the number and financialamount of claims for both the escrow and no escrow accounting methods.The financial amount of the claims is called the loss costs. Thisinformation is used to compute numerical distributions for thecumulative probability of loss as a function of the loss amount. Thesedistributions are called claim risk distributions.

680 Run Stochastic Model to Develop Claim Risk Distributions.

At the step, a numerical procedure is applied using commercial softwareor specialized programming that applies steps 640, 650, and 660 toaccumulate sufficient loss data to develop a numerical distribution ofthe probability of loss as a function of the loss amount for both theescrow and no escrow accounting approaches.

690 Determine Rate-on-Line Premium.

At this step, the prescribed rate-on-line criteria selected in step 620is applied to each annual exceedance threshold selected in step 640. Therate-on-line premium calculation may be performed by multiplying theexceedance threshold, the insured Savings minimum, or floor by thedecimal value of the rate-on-line. For example, if the insured floor is$10,000 and the rate-on-line is 10%, then the premium requirement is$10,000 *0.10 or $1,000. These calculations are applied to each insuredannual savings floor as computed in step 640. The results are summed andplaced in a Term of Loss Cost Summary Section of the system.

700 Determine Loss Cost Confidence Level and Loss Cost Values.

At this step the underwriter enters the likelihood requirement, inpercent, that the loss costs obtained from the system will be actuallyless than the identified values. These percentages are then applied tothe claim risk cumulative distributions for each year to determinecorresponding value for the yearly loss costs contribution to the totalmulti-year premium. The resultant values are placed in the yearly losscost fields. This is performed for the claim risk distributions with andwithout escrow accounting.

710 Compute Loss Cost Policy Premium Component.

At this step, the rate-on-line premium values for each year are summedto compute the total policy premium via the rate-on-line method. Next,the annual loss costs determined in step 680 are summed over the policyyears for the Escrow and No Escrow pricing methods. The system user thenselects which Escrow pricing method may be required for the client. Thesystem subsequently computes the policy loss cost premium component asthe maximum of (1) prescribed rate-on-line, and (2) the summed losscosts via the Escrow method selected.

720 Determine Underwriting Expenses.

At this step, the company expenses, required to perform the underwritinganalysis and risk surveillance are entered. These costs are incurred inreviewing monthly, quarterly, and yearly Savings reports andperiodically meeting with client management at the client sites. Theunderwriters' responsibility is to ensure the client is meeting theircontractual responsibilities and the Savings targets. If the client isin compliance then coverage continues as defined in the policy. If theclient is not in compliance, then it is the underwriters' responsibilityto notify company engineering and notify client management, in writing.If compliance with engineering recommendations and other policyconditions are not met in the time constraints as specified in thepolicy, then the underwriters have the responsibility and the authorityto terminate insurance coverage. The expenses incurred performing theseactivities are entered into the system for each policy year.

730 Determine Engineering Expenses.

At this step the technical engineering, project management, and Savingsoversight activities are reviewed for compiling their associated policyexpense costs. Engineering activities provides technical data to supportunderwriting activities, provides periodic loss prevention and Savingsreporting, provides technical directions for initiative implementation,and serves as the on-site liaison between the insurer and the insured.The expenses incurred performing these activities are entered into thesystem for each policy year.

740 Determine Engineering Related Underwriting Credits and Debits.

At this step, pricing modification factors are determined that increaseor decrease the premium based on engineering related attributes of theSavings implementation insured values as selected in step 620. Thesefactors include, but are not limited to, the insured's organization andbusiness culture, new technology applications, management motivation toachieve the Savings targets, supervisor motivation, and plantcomplexity. The range of the modifiers will vary with application butgenerally are 10% for each factor with an aggregate factor of no lessthan −20% and no greater than +25%. The engineering risk modificationfactors are entered into the system for each policy year and anaggregate modification factor is computed.

750 Determine Underwriting Related Credits and Debits.

At this step, the pricing modification factors are determined thatincrease or decrease the premium based on the underwriting relatedattributes of the Savings insured values as selected in step 620. Theserisk modification factors include, but are not limited to, policyexclusions that are in place, the insured self insured retention,deductibles, limits, and the Savings measurement and verificationprogram quality. The range of the modifiers will vary with applicationbut generally are 10% for each factor with an aggregate factor of noless than −20% and no greater than +25%. The underwriting premiummodification factors are entered into the system for each policy yearand an aggregate modification factor is computed.

760 Compute Adjusted Policy Premium.

At this step, the numerical results determined in previous steps arecombined to produce the basic policy premium. There are several versionsor combinations of the steps outlined in this procedure that are claims.An example of one such embodiment is:

Adjusted Policy Premium=Step 710 (Loss Cost Policy Premium)*[1+Step 740Engineering Modification Factors)+Step 750 Underwriting ModificationFactors)]. This result is stored in the Premium: Insurance AdjustedPremium Section of the system.

770 Compute Policy Underwriting and Engineering Expenses.

At this step the underwriting expenses determined in step 720 and theengineering expenses determined in step 730 are inflated using theinflation rate entered into the system in step 620 over the policy termand summed to compute the total policy level underwriting andengineering expenses. These results are stored in the Premium: Insuranceand Engineering Expense Sections of the system.

780 Compute Engineering and Underwriting Profit.

At this step, company-specific guidelines are applied to computeinsurance and engineering profit based on the expenses computed in steps760 and 770. These results are stored in the Premium: Profit-Insuranceand Engineering Sections.

790 Compute Allocated Reinsurance Costs.

At this step, reinsurance costs, whether facultative or treaty related,are entered into the Reinsurance section of the system.

800 Compute Taxes.

At this step, taxes are computed on the pertinent sections of thePremium Section of the system and entered in the system in thePremium-Insurance and Premium and Engineering: Taxes Section.

810 Compute Commissions.

At this step insurance related commissions are computed on the pertinentsections of the Premium Section of the system and entered in the systemin the Premium-Insurance: Commissions Section.

820 Compute Total Policy Engineering Costs.

At this step, all premium costs entered into the Premium-Engineeringrelated sections are summed to compute the total policy engineeringcosts.

830 Compute Total Policy Premium.

At this step, all premium costs entered into the Premium-Insurancerelated sections are summed to compute the total policy premium. Also,based on the policy requirements and the pertinent accountingprocedures, the total policy premium can also include the totalengineering costs. In this scenario, all risk transfer and directengineering costs required to support the policy are included in thetotal policy premium which is divided by the policy term to determinethe annual premium. Depending on the insurance conditions, the insuredmay pay the whole premium at the beginning of the policy term or pay onan annualized basis.

FIGS. 7A and 7B depicts a spreadsheet encompassing the steps disclosedin FIG. 6.

The methods disclosed above can be used to ascertain a securitizationrating VB and FS ratings can be based on benchmark data for a particularasset, e.g. the power generation station of FIG. 1.

For example, FIG. 8 illustrates such method. Engineering data such asimproving yields 940 or other initiatives 950, both depicted in FIG. 8Ais collected for each required asset at step 900. The engineering datais compared with benchmark data to create an action plan and financialgoals at steps 910 and 920. FIG. 8B illustrates an exemplary action planwhile FIG. 8C illustrates the financial goals.

For example, FIG. 8B includes various actions to be initiated byemployees 960, such as detailed process evaluation 970 and trainoperators 980. FIG. 8C shows how the risk curves can be used to selectannual insurance levels and also provide information to select financialgoals for the improvement program overall. For example, followinggeneral insurance company guidelines, a company chooses the 90%exceedance probability and moves horizontally over until we cross theYear #1 risk curve at 990 where at 90% risk acceptance value forinsurance purposes is $20M at 995. This typically means there is a 90%chance that the actual result will be greater than $20M. The company canalso use these risk curves to set their internal financial goals at moreaggressive risk acceptance values. For example, company management maytarget the 60 or 70% levels for the business unit targets which for year#1 would be a goal between approximately $22-$25M. The same procedure isapplied for Year #2. The insurance risk acceptance percentile intersectsthe risk acceptance curve at 1000 which corresponds to $26.7M NCM annualsavings at 1005. This amount would be selected as the insured floor. Forthe company's internal financial goals, using the 60-70% guidelines asin Year #1, Year #2 company financial goals would be between $28-29$M. Asecuritization rating can be ascertained based on the action plan andfinancial goals at step 930 (FIG. 8).

Implementation of the present invention may also improve an insured'sbond rating. FIG. 9 illustrates cost savings as a result of a reductionof credit risk. For example, suppose improving the operations utilizingthe present method can increase the Savings by $700 million of aninsured over a ten (10) year period. In the course of developing thiscompany's credit risk for the purpose of developing a bond issue, thelending institution and or credit agency involved may give the companycredit for the enhanced operational and financial status by applying themargin benefit to the reduction of the principal at risk. This may be asubjective decision. However, the method applied to this situationoffers a risk transfer of principal from the client to the insurerthereby securitizing at least a portion of the principal. Suppose theclient has a credit rating of BB− by S & P. A policy utilizing thepresent invention for this client can have effect to reduce theprincipal at risk thereby also reducing the transaction's credit risk.Through the risk transfer of this principal to the insurance company,the initial transaction (now at effectively a lower principal) can havean equivalent credit risk of the full bond amount at a higher qualitycredit rating.

For example, if a client has an $600M policy according to the presentinvention for over the ten (10) years of a $800M bond, the reducedeffective principal at risk ($200) make the transaction appears, from acredit risk perspective as slightly above investment grade, BBB−. Thismeans mathematically the credit risk of a $200 BB− bond may be roughlyequivalent to the credit risk of an $800M bond rated at BBB−. Thissituation illustrated at 1010 in FIG. 9. This example assumes theinsurance company's credit rating is at least BBB−.

Referring to FIG. 10, a computer system used to implement some or all ofthe method and system is illustrated. The computer system consists of amicroprocessor-based system 1100 that contains system memory 1110 toperform the numerical computations. Video and storage controllers 1120enable the operation of the display 1130, floppy disk units 1140,internal/external disk drives 1150, internal CD/DVDs 1160, tape units1170, and other types of electronic storage media 1180. These storagemedia 1180 are used to enter the risk distributions to the system, storethe numerical risk results, store the calculation reports, and store thesystem-produced pricing worksheets. The risk distributions can beentered in spreadsheet formats using, e.g., Microsoft Excel. The riskcalculations are generally performed using Monte Carlo simulationseither by custom-made programs designed for company-specific systemimplementations or using commercially available software that iscompatible with Excel. The system can also interface with proprietaryexternal storage media 1210 to link with other insurance databases toautomatically enter specified fields to the pricing worksheet, such asclient name, location address, location size, location occupancy, andrisk quality attributes applied in the “Credits and Debits” section. Theoutput devices include telecommunication devices 1190 (e.g., a modem) totransmit pricing worksheets and other system produced reports via anintranet or the Internet to management or other underwriting personnel,printers 1200, and electronic storage media similar to those mentionedas input device 1180 which can be used to store pricing results onproprietary insurance databases or other files and formats.

FIG. 11 is a block diagram that depicts the terms and conditions of aninsurance policy 1300 according to the present invention. The insurancepolicy 1300 includes insured information 1310 such as a name of theinsured, geographic or physical location(s) of the insured to be coveredby the policy. Also included in the policy 1300 is a policy period 1320.The policy period 1320 can be over a single year, multi-year or someother defined period of time. Policy terms 1330, such as savingscriteria is included. The savings criteria are generally crafted by athird party company (e.g., HSB Solomon Associates) that uses benchmarkinformation in creating the savings criteria based on the particulars ofthe insured's business. The savings criteria include processes that ifimplemented by the insured establishes a sum certain savings to theinsured. The third party company can serve as a facilitator in processexecution enabling the insured to improve operating performance(resulting in a savings). If the process is implemented and the sumcertain savings is not realized by the insured over the policy term(with certain exceptions outlined in the policy), the insurer will paythe insured the difference (referred to as a shortfall). The certainexceptions include, but are not limited to, hostile or warlike action,insurrection, rebellion, civil war, nuclear reaction or radiation,default or insolvency of the insured, vandalism, riot, failure ofcontractors to implement the processes, modification or alteration tothe processes that were not approved by the insurer or other termsoutlined in the policy. Other policy terms 1330 include duties of theinsurer and duties of the insured such as execution of the processes ina timely manner, cooperation with the third party company, preparationof status reports, permission by others to audit the insured's accounts,performance records and data logs and other matters. Furthermore, if thesavings are determined on a yearly basis and the policy is a multi-yearpolicy, and as a result of the insured implantation of the processes, ashortfall occurs, such shortfall could be kept in an escrow account(herein referred to as a surplus account). The escrow could increase ordecrease over the multi-year policy. Any surplus at the end of thepolicy term can be paid to the insured. Other terms can includecancellation terms, representations and warranty, assignment obligationsand effects due to the sale or transfer of a covered location.

The policy 1300 also includes monetary policy limits (i.e. limit ofliability) 1340 over the time period 1320 and premiums 1350 to be paidby the insured and endorsements 1360. Such endorsements can includemarket price indexing and operational baselines unique to the insured'sindustry, the implementation plan and schedule, agreed metric plan,savings calculation procedures and baseline values, debt obligations andadditional exclusions, definitions and conditions.

FIGS. 12A-12D illustrate an agreed metric plan. The agreed metric planprovides top level task lists of an implementation plan and schedule.For illustrative purposes, the plan is divided into four sections,namely, initiative 1400, benefits and measurements 1402, implementation1404, and savings 1406.

For example, in FIGS. 12A, 12B, 12C and 12D, the agreed metric planpertains to a chemical industry policy. From the implementation plan andschedule, various top level initiatives 1400 are listed in FIG. 12A. Forexample, some of the initiatives from a chemical industry policy mayinclude movement of an analyzer to trays and modification of regulatorycontrols on final product columns 1408 for a particular plant 1410(Initiative #1). The column titled “area” refers to geographical orfunctional location the initiative, e.g., Plant 1. Another initiativefor an insured's site may include the reduction of pressure in astripper to save energy 1412 (Initiative #2). Furthermore, anotherinitiative for another plant may include the reduction of time to drycatalyst after regeneration 1414 (Initiative #3). Documents or otherdeliverables 1418 are provided to document the results of theimplantation of the initiatives. An example of such a document 1420 mayinclude a report describing the savings achievement as a result of theimplantation of initiative #3.

One embodiment of the benefits and measurement section of the agreedmetric plan is provided in FIG. 12B. Implementation of the initiativemay result in certain benefits that are described in this section. Forexample, for initiative #1, one benefit 1422 may be a productionefficiency improvement. The plan includes various measurement values andmethodologies that are directed to the results of the initiative. Thevalues and methodologies may relate to engineering units (e.g., t/h) andtime periods (e.g., measurements are done daily and then averaged over aperiod). Furthermore, the plan includes dates (target and actual) forthe commencement of the initiatives and completion dates of theinitiatives. The agreed metric plan typically requires the agreement andsign off (e.g., initials of the insured and insurer) 1424 of eachinitiative and initiative results (i.e., the agreement section).

The plan also includes target and actual dates as shown in FIG. 12C.Each initiative may have a target date of completion 1426, actual dateof completion 1428 and the number of days for completion 1430.

The plan also include information regarding the economic Savings 1432 asa result of the implantation of the initiatives. Such information mayinclude target Savings 1434 and actual Savings 1436 achieved as a resultof the initiative.

The foregoing disclosure and description of the invention areillustrative and explanatory thereof, and various changes in the detailsof the illustrated method may be made without departing from the spiritof the invention.

1. A method for establishing a rating system, comprising the steps of: collecting engineering data of a performance of the facility; comparing the engineering data with industry benchmark data; creating an implementation plan and schedule based on the comparison; and calculating the reduction in a credit risk for an insured.
 2. The method of claim 1, wherein the facility is a power generation plant.
 3. The method of claim 1, wherein the facility is a chemical plant.
 4. The method of claim 1, wherein the facility is a refining plant.
 5. The method of claim 1, wherein the facility is a manufacturing plant.
 6. The method of claim 1, wherein the engineering data is a yield improvement.
 7. The method of claim 1, wherein the implementation plan and schedule involves process evaluation and train operators.
 8. The method of claim 1, wherein the reduction in credit rating improves a securitization rating.
 9. The method of claim 8, wherein the securitization rating is a Standard & Poor rating.
 10. The method of claim 1, wherein one of the steps is performed with a computer system. 